Government Shutdown, Sequestration Slow IT Spending: Forrester

The shutdown, the threat of not raising the debt ceiling and sequester cuts mean less government and corporate spending on technology, the analysts said.

The various self-induced Washington budget crises will reduce the amount the government and businesses spend on technology goods and services this year, according to a report from Forrester Research.

Forrester analysts are reducing the amount of growth they expect to see in the U.S. tech market from 5.7 percent to 3.9 percent, thanks to the deep federal budget cuts known as sequestration, the three-week partial shutdown of the U.S. government and the threat by some Republican lawmakers not to raise the government's debt ceiling, a move that would have forced the United States to default on its financial obligations and shaken the global economy.

"The Congressional juveniles with their calls for big Federal budgets cuts, tolerance of Federal government shutdowns and flirting with Federal debt defaults have been put back into their corner, so it is time to assess how much damage they have done to the US tech market," Forrester analyst Andrew Bartels wrote in an Oct. 28 post on the firm's blog.

The most impact on spending was on the federal government side the equation, Bartels wrote. Federal spending on IT was down, while the amount of technology state and local governments bought grew a little, he said. Supercomputer maker SGI has seen the impact of the Washington budget battles, with executives saying Oct. 10 that sales and profits for the most recent quarter will take a hit because of the shutdown, and that revenues for the current fiscal year could fall by as much as 10 percent.

"But since the effects of reduced Federal spending have flowed into the private sector, purchases of computer equipment have also slumped, as cautious CIOs dial back their spending on these easily deferred categories of the tech budget," Bartels wrote.

Servers and PCs easily fall under the classification of "easily deferred" technology, particularly given such alternatives as infrastructure-as-a-service (IaaS)—where organizations have access to hardware owned and operated by someone else, rather than having to buy the hardware themselves—and tablets, which can be used instead of PCs. However, Bartels said, corporate spending on tablets has slowed this year "as the initial rush to put these new devices into the hands of employees has [given] way to a more measured adoption curve."

There have been some bright spots, he said. Businesses—and, to some degree, government—buying software has increased, jumping 6.2 percent after growing 6.1 percent in 2012. Software-as-service (SaaS) solutions—especially in some instances, such as smart process applications and other "collaborative software"—have done well, as have business intelligence, analytics and big data software.

Demand for communications equipment to support the growing popularity of mobile applications also continues to grow this year, increasing 8.1 percent over 2012, according to Forrester.

That said, spending on licensed software for big corporate applications like enterprise resource planning (ERP) and customer relationship management (CRM) has slowed. So has spending on IT outsourcing and telecommunications services.

For 2014, Forrester analysts are forecasting that spending on IT goods and services by government and businesses will jump 5.3 percent, due to a strengthening housing market, modest gains in employment and consumer spending, and growth in export markets in Europe and Asia. Spending on software, IT consulting and systems integration again will lead the way.

The forecast assumes that President Obama and Republican lawmakers will not reach agreement on a budget that includes long-term entitlement changes, tax reform and more tax revenues, and that the sequester spending cuts—which hit everything from the military and research and development to infrastructure and other discretionary accounts—will not be replaced by more sensible measures.

However, the hope is that as the federal budget deadline nears in January and the debt ceiling comes up again in February, there won't be a repeat of the shutdown—which the government estimated cost the country $24 billion in lost productivity and other areas—or threat to the country's ability to pay its obligations.

A budget agreement and the end of sequestration spending are "probably too much to hope, though it would lead to even stronger economic and tech market growth," Bartels wrote. "Still, we are assuming that the Federal government will get through the first quarter without a renewed Federal government shutdown or new threats not to raise the Federal debt ceiling. Should even that assumption prove too optimistic, then our 2014 forecast for the US tech market will once again have to be ratcheted down."